Occasionally it happens that by the time an employer discovers a building defect, the main contractor's financial position is such that it would not be worthwhile for the employer to sue because the main contractor may not have the means to pay the awarded sum.

In those circumstances the employer might consider bringing proceedings against another party in the project such as a professional consultant or a sub-contractor (if they carried out the works).

If there was a contract between the employer and the prospective defendant and the defect arose as a result of a breach of a contract term, the employer could sue under contract. In the absence of a contract, or if the defect did not arise as a result of a breach of a contract term, the employer could consider other grounds for suing- say that the prospective defendant somehow assumed responsibility in addition to the responsibilities of a contracting party, thereby owing a duty of care in tort to prevent the employer suffering economic loss.

This type of economic loss or interest receives little protection by the law; the rationale being that in a free market economy one person's conduct is always liable to have economic consequences for another and, economic activity is justifiable simply by having regard to the individual's own interests. This rationale extends to building claims.

The recent United Kingdom court decision in Sainsbury’s Supermarkets Ltd. v Condek Holdings Ltd. & Ors [2014] EWHC 2016 demonstrates the difficulties with pursuing a non-contracting party based on alternative grounds.

Sainsbury’s Supermarkets Ltd. v Condek Holdings

Sainsbury's Supermarkets (Claimant) brought court action against various defendants in relation to a supermarket car park that it alleged was defective as a consequence of inadequate design and construction, and consequently needed to be demolished.

The car park involved what was said to be a 'novel' design invented by the Third Defendant, Mr Andreas Pashouros. The First Defendant, Condek (Mr Pashouros' company of which he was managing director) contracted with Sainsbury's to carry out the work. Mr Pashouros was joined as a defendant because Condek was in liquidation.

Sainsbury’s argued that Mr Pashouros had assumed a personal duty of care to ensure that the materials supplied for the project were of satisfactory quality and to use reasonable care to ensure that the work by others was carried out in a good and workmanlike manner. Mr Pashouros alleged that he owed no such duty of care.

Sainsbury's alleged that Mr Pashouros in his personal capacity had been the owner of the design of the Condek car park system design, and as sole owner he was the only person who stood to benefit financially from putting his design into commercial use. It also alleged that the communications with Sainsbury's about the car park were 'with and through Mr Pashouros directly', and that Condek was a licensee used by Mr Pashouros at his direction as owner of the design to carry out the commercial implementation of his design so that he could personally financially benefit. It then submitted that, in all the circumstances, 'by reason of Mr Pashouros' ownership of the design of the Condek car park system, his direct involvement in promoting the use of the Condek car park system to [Sainsbury's] during his negotiations…, and his overall control of it during the course of its implementation, Mr Pashouros assumed a responsibility to [Sainsbury's] at common law for his design and its successful commercial construction...'.

Mr Pashouros submitted that all of his actions were consistent with him acting as a director of Condek in a routine way, and that there was no feature which crossed the line to suggest or demonstrate that he had assumed personal responsibility.

The Court rejected Sainsbury's submissions. It held that it was commonplace for a trader to transfer his business to a limited company in order to benefit financially from its commercial exploitation, and also to benefit from the separate legal personality and limited liability. If it was the case that an inventor who wanted to make money will be taken to have assumed personal responsibility despite trading through a limited company, the main benefits of incorporation would be lost. It was also routine for a director of a company that he has incorporated to be the spokesman to promote the company's business, including to use language which is consistent with his personal involvement without suggesting that he has personal responsibility over and above that of his company – if it was the case that an inventor or designer who wished to exploit his invention or design through a limited company would assume personal responsibility if he promoted the invention or design on behalf of his company, the benefits of incorporation would be lost.

The Judge held that, to establish that there was a duty of care upon Mr Pashouros to guard against economic loss, 'it will not be sufficient [that]…the director does no more than act in a way that is consistent with his position as a director'. Mr Pashouros therefore had to have done something over and above what could be expected of him as a director of Condek.

The Court further rejected Sainsbury's submission that this was a case of a 'black hole which the law of tort should fill' because of the financial position of Condek. The Judge said Sainsbury's could have hedged its risk in a number of ways, including by obtaining insurance or a bond. The fact that Condek went into liquidation was a risk that Sainsbury's chose to take.

This decision is a reminder that employers and main contactors should carefully consider obtaining adequate security such as a parental or bank guarantee to safeguard against a financially risky contractual counter-party, as there is often very limited scope for successfully arguing that a party owes a duty of care in tort.